Two-Tiered Profit Sharing

[jpod]

Anyone see a qualification problem with the following in a profit sharing plan document?

Plan has two tiers of employer profit sharing contributions. The Company can declare a contribution under one of the two, separate contributions under both, or none. The annual Board resolution or other written declaration will be very specific as to what is being declared.

1. Contribution allocated uniformly to all participants based on their compensation.

2. Contribution allocated in a uniform flat dollar amount for each participant.

[movedon]

Is 1 a percentage of pay? If so, I'd say it's fine. I guess technically if they did both in one year they might have to general test it, but it will pass on a contributions basis.

[John Feldt ERPA CPC QPA]

No general test needed. See Treasury Regulation 1.401(a)(4)-2(b)(2)(i) and 1.401(a)(4)-2(b)(4)(vi).

Treasury Regulation 1.401(a)(4)-2(b)(2)(i):

Basically says a uniform percent is a safe harbor and a uniform dollar amount is a safe harbor.

Treasury Regulation 1.401(a)(4)-2(b)(4)(vi):

Basically alllows the greater of two or more safe harbor allocation formulas, or the sum of two or more allocation formulas as long as: they are the only allocation formulas, available on the same terms to all eligible employees (okay to exclude HCEs), and the top heavy minimum can overrides the allocation otherwise given if needed to meet TH even if only given to non-keys.

By "safe harbor" above, they mean no discrimination test needed for the allocation of the employer contribution. It is not referring to the "safe harbor" 401(k) provisions for the 3% SH or the SH match used for avoiding ADP/ACP.

[jpod]

I intentionally held back because I wanted to hear all ideas, but what I was primarily concerned with is whether the two-tiered structure somehow is inconsistent with the "definite allocation" principle.

[Bird]

Yes, I think it is inconsistent with the "definite allocation" principle. The second reg cited says (my emphasis) "The plan provides that an employee's allocation under the plan is the greater of the allocations determined under two or more formulas, or is the sum of the allocations determined under two or more formulas."

That doesn't seem to fit the scenario here.

(More and more, we are just saying "everyone is in their own group" to avoid this kind of decision-making. I know you have to general test, but certainly in the pro rata scenario the general test is passed. The uniform flat dollar might not...but that's the point, you can't have it all ways. It's not unreasonable, to me, say that if you want a uniform flat dollar formula, it has to be hard-coded.)

[jpod]

But, if the reg acknowledges that you can have either the greater of the two formulas or the SUM of the two formulas, why can't one of the formulas yield ZERO so you get the SUM of two formulas (one being ZERO and the other being whatever)?

[Bird]

Very clever. I don't know if that was the intent but it sure seems ok.